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Tian Guoqiang:Governance, from reflections to development.

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Tian Guoqiang: many thanks go to Professor Patrick Bolton for his thought-provoking and far-reaching presentation, giving some important viewpoints on regulations of the energy industry. Now I would like to invite our guests to the stage. Professor Feng Genfu, Professor Huang Haizhou, Professor Qian Yingyi and Professor Xu Chenggang. We are free to speak in Chinese or English, and we have simultaneous interpreters today, so both English and Chinese will work. First of all, as the moderator, I will speak first, in Chinese, as it is more convenient for all. My topic is: Governance, from reflections to development.

 

In his presentation, Professor Patrick Bolton examined the impact of government deregulation on corporate ownership concentration, cost efficiency, price, financial risk and consumer profitability, using the power sector in the US as an example. There are gains and losses with deregulation. It is a good way to reduce costs, lower prices and raise ownership concentration; however, it may also bring about rising financial risks and have no significant impact on consumer welfare. The overall effect on improving resource allocation efficiency is not obvious. These conclusions are mostly consistent with the current basic economic theories. With economies of scale in the industry, the market will probably fail, thus requiring some government regulation. Without regulation, there may be problems. In the United States where there exist economies of scale and already considerable freedom in the market, further deregulation is not necessarily a good thing. But this is not the case for China. In China we have strong government intervention, and if we allow further government regulation, things will be quite different, because our situation is just the opposite. Next, on China's state governance and corporate governance, I will give you three points on the reflection and development of governance: first, the essence of governance is the design of the system and the mechanism, or the proper design of the so-called rules of the game; second, do not obliterate the guiding role of economic theories with mere reflections; third, our reform and governance should have a sense of purpose, and be transitional.

 

First of all, governance is essentially the design of the system and the mechanism, and the guidance of mechanism design theories is indispensable from the country's governance level, industrial governance level and corporate governance level. There are three very important keywords in our journey of reform and development, which we must take into account in developing the system and policies: first, the effectiveness of information, with as little as information utilized; second, to encourage compatibility, so that others and all individuals could do something good for the society objectively even if their purpose is to seek profits; third, the effectiveness of resource allocation. Incentive mechanism design is developed by Hurwicz from neoclassical economics, which contains a reflection on the limitations of neoclassical economics. However, this reflection doe not focus on mere reflection and criticism, nor does it deny neoclassical benchmarks and references, or its analytical framework and methodology, but it amends the neoclassical economics and develops widely used basic design theories, such as Professor Bolton's contract theory.

 

Chinese economists have a lot of debate on whether the system should be designed, and many of them deny the importance of system design according to the principle of spontaneous order by Ludwig von Mises and Hayek, representatives of the Austrian school. In fact, I also very much respect the economic thinking of Ludwig von Mises and Hayek, and I agree with many of their viewpoints, but I cannot be overgeneralizing. Some systems are a result of gradual evolvement, such as social customs, social norms, culture and other informal systems. But most of the formal systems are also designed or officially confirmed at the same time, based on political, economic, social and environmental factors. A very good example would be the formulation of the constitution in the US. The constitution established 200 years ago transformed the US to the most developed country in the world within a short period of time, and I do not see any signs of decay for it in the next 50 years.

 

The reason why there is such a misunderstanding is that many people, of course, including our policy makers, arbitrarily design systems, mechanisms or regulations, such as the stock market fusing mechanism design two years ago, and the crux is that they are not clear that system design is based on political, economic, cultural and cultural initial endowment premises, and they should adopt corresponding changes to the system according to environmental changes to these premises. Therefore, in this sense, it is, to some extent, echoing with the idea that systems should be a result of evolvement, proposed by Ludwig von Mises and Hayek, instead of being opposite to each other, as some Chinese economists would imagine. In mechanism design, there is a very classic illustration, showing that to achieve our social objectives, the design of the incentive mechanism must be based on the institutional environment as a prerequisite and give full consideration to China's national conditions and realistic constraints, and then according to individual incentives and reported information, rules of the game will be developed, followed by implementation of regulations and government by law. How do we achieve that? And how can we solve the problem? So the criterion for a well designed mechanism is whether or not we could consider the institutional environment as a constraint.  

 

Secondly, we cannot obliterate the guiding role of economic theories with mere reflections, which is related to the current reform and opening up and the market-oriented reform. Modern economic theories provide two very important points. The first type of benchmarking theory is to focus on the goal, to solve the problem of the target direction, to solve the problem of what to do; the second category is relatively practical theory, focusing on problems of how to do. The first type of theory provides the benchmark and the reference system, such as the neoclassical economics, helping to seek the truth and indicate directions for selecting basic systems. Without a benchmark theory as a measure of scale, one cannot know how big the gap is between reality and ideals. For general questions, such as limited or effective government, state-owned enterprises or private enterprises, market-oriented reform or not, benchmark theories can be a good guidance, which is beyond doubt. The basic theories of modern economics, including neoclassical economics, give us a clear direction. But to solve practical problems, we still need pragmatic and practical theories, e.g. market design theory, auction theory, matching theory. etc., to figure out how to do. The premise of these theories is even more realistic, which is based on the amendment and development of basic theories, playing a more effective and pragmatic role in solving real problems.  

 

Why should we talk about the importance of economic theories? For example, many people, based on Schumpeter’s theory, emphasize innovation and entrepreneurship, which are very important conditions for sustainable development of a country. This is absolutely right. But we need to note that they are neither exogenous variables nor natural. Enterprises and entrepreneurs are not born to be innovative; rather, they prefer the profits. How to make them innovative and entrepreneurial? Is there a good basic institutional environment as a prerequisite? Baumer, who just passed away, expanded Schumpeter's theory of innovation and elaborated that innovation and entrepreneurship are established on the basis of institutional choices, which are endogenous variables. If the rules of the game that affect entrepreneurial behaviors are abnormal and even destructive, then the entrepreneurial spirit could not be released. Do we have so many state-owned enterprises for innovation? With the innovation success rate less than 5%, will the leaders of state-owned enterprises dare or have the incentive to be innovative? It is hardly possible. Therefore, the establishment of the most basic system and the modern market system is most critical, and we must build up a modern market and improve the modern market system.

 

Some economists, however, make (perfect) competition confronted against monopoly, and deny the judgment that the best market is the market with perfect competition. Market competition and enterprise innovation are an integral part of economic development: competition leads to a decline in corporate profits; the more intense the competition is, the faster corporate profits decline, and companies have to innovate, which brings about monopoly profits to attract more enterprises to compete, thus forming a repeated cycle of competition → innovation → monopoly → competition. Through this dynamic game between the market and enterprises, the market remains vital, leading to increased social welfare and economic growth.

 

Thirdly, for China, a transitional economy, its reform and governance should have a sense of purpose, and be transitional. China's economic environment is different from that in developed countries; we need a basic system for reform, or in the final analysis, the ultimate is to solve two key issues: to improve efficiency and to drive innovation. The former makes the real growth rate closer to the potential growth rate, and the latter continuously raises the potential growth rate. However, as the reform is not fully in place, there are major problems in both aspects. The key to sound and rapid economic development lies in the real market-oriented institutional reform, and its theoretical guidance should return to the most basic economic principles, logics and common sense.

 

First of all, we have to consider the two largest objective individual factors. State or business or individuals, they are all profit-driven under common circumstances, and it is easy to handle with just this constraint, and even possible with well operated plan economy. But the other major realistic constraint is information asymmetry. For example, you say something, and I do not know if it is true, even though you are staring at me with both your eyes, and I do not know whether you listen to me or not. To clarify the situation is the prerequisite to do something well. Therefore, we have to base on three key words, i.e. information, incentives and efficiency, and be fully aware of the negative side of an effective and omnipotent government, and deepen the reform with the purpose of a limited government and an effective market. We should let the market play a decisive role and the government play an appropriate role, so as to improve efficiency and promote innovation. At the same time, considering merely the government and the market is not enough, we also need to take into account the social order, ethics and culture, so that we can address the relationship between government and market as well as between government and the society, and finally form a trinity among government, society and market, to realize inclusive growth and achieve the modernization of the state governance system and governance capacity.

 

Second, even though the benchmark theory indicates the clear ways to improve or clarify the reform orientation, the goal is still not equal to the process. In order to solve the realistic problems in China, we need to figure out a variety of transitional institutional arrangements; in this sense, the system is designed, but also evolved, and practical economic theories should be developed to address the realistic problems in China. Practices in China's economic and social changes provide a strong driving force and a broad space for economic theory innovation and academic prosperity. Theoretical innovation still has a long and arduous way to go.

 

This is my point of view, including some comments and supplements to Patrick Bolton's report. Now there is some time left, and each of you here has 10 minutes to speak.

 




◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation